WORKSHOP ON FINANCING FOR ASEAN MSME IN THE 21ST CENTURY By Ms Darawati Hussain, Chairman of Malaysian Venture Capital & Private Equity Association July 2011

CONTENTS Page Introduction to MVCA 3 Private Equity as an Alternative Asset Class 9 Insights into PE Investing 15 The Malaysian Challenge 22 2 2

INTRODUCTION TO MVCA 3

OUR MISSION & OBJECTIVES To promote, develop and maintain the venture capital industry in Malaysia as a source of equity financing for business enterprises principally for the start-up and/or development of small and medium sized enterprises. To promote cooperation among members, encourage joint efforts and business undertakings as well as to provide a regular forum for the exchange of views amongst members and also foreign industry players and regulators. To represent, express and give effect to the views and opinions of persons or companies engaged in the venture capital industry, including making representations to all governmental or public authorities or bodies. To develop and encourage the highest standard of professional ethics in the venture capital industry. 4

OUR TARGETS To promote private sector’s participation in the VC/PE industry and thus, expanding the fundraising opportunities for the Fund Managers. To develop and expand the VC/PE industry in Malaysia by increasing the number of VC/PE firms and VC/PE Funds as a supporting engine to innovation. To develop the skills and experience of the local VC/PE companies by providing a larger funding platform and thereby, encouraging the companies to invest regionally and globally. To increase the number of VC/PE professionals and introduce more structured human capital development programmes in Malaysia for talent development and succession for the VC/PE industry. To support Government-backed programmes to produce quality entrepreneurs and technopreneurs To support Government initiatives to promote Malaysia as the hub of Islamic VC/PE which will be an integral part of the strategy to turn Malaysia as the hub for global Islamic finance. 5 5

INDUSTRY OVERVIEW INDUSTRY PARTICIPANTS 2010 2009 % Change No of Registered VC Funds or Companies 58 59 -1.69% No. of Registered VCMCs 55 0.00% No. of Investee Companies 389 445 -12.58% SHAREHOLDING STRUCTURE   100% Local Ownership 102 104 -1.92% Joint Ventures 9 100% Foreign Ownership 2 1 100.00% VENTURE CAPITAL INVESTMENTS As at Dec 2010 As at Dec 2009 % Change Total Committed Funds Under Management RM 5.9 billion RM 5.3 billion 11.45% Total Investment RM 3.4 billion RM2.6 billion 31.05% Investment in Investee Companies RM 453 million RM 597 million -24.12% Divestments RM 89 million RM 43 million 106.98% Source: Securities Commission 6

INDUSTRY OVERVIEW Source: Securities Commission 7

INDUSTRY OVERVIEW Number of Islamic Venture Capital Firm: 2 The number of venture capital professionals currently stands at 160 people. This number is based on professionals with at least 4 years experience in the venture capital industry. 28 venture companies were divested in 2010 compared to 21 in 2009. However, only 1 VC-backed company was listed on ACE Market of Bursa Malaysia in 2010. Source: Securities Commission 8

PRIVATE EQUITY AS AN ALTERNATIVE ASSET CLASS

WHAT ARE ALTERNATIVE ASSETS? Traditional asset classes available to investors include equities and bonds Alternative assets simply describes NON TRADITIONAL asset classes Asset Classes Asset Classes Public Derivatives Debt Securities Equities Non-traditional/Alternative assets include: Real estate Private equity Venture capital Hedge funds Commodities Others, e.g. wines, antiques, art Common features of alternative assets: Less liquid than traditional assets Caters to institutional or high net worth individuals Has mid-to-long term investment horizons (3 years or more) Real Estate Private Private Equity &Venture Capital Commodities Others Cash Fixed Income 10

HOW A PRIVATE EQUITY & VENTURE CAPITAL FUND WORKS PE/VC MANAGEMENT TEAM (e.g. CIMB PE & VC) INVESTORS (e.g. GLCs) PE/VC FUND CO (e.g. CIMB PE Fund 2) x% equity PORTFOLIO COMPANY 1 100% Preference Shares y% equity PORTFOLIO COMPANY 2 z% equity PORTFOLIO COMPANY 3 11

PRIVATE EQUITY IN A BUSINESS LIFECYCLE Seed - For initial concept for R&D of a product Early - For product development and initial marketing; the company may be in the process of being organised or may have been in business for a short time, but has not yet sold its product commercially Expansion - For growth and expansion of a company that has built up a short track record; used for increasing production capacity, market/product development and/or additional working capital Growth/Mezzanine - Financing to help a company go public/trade sale Late Stage - Financing in form of loan/equity to enable MBOs or MBIs of an existing product/business Turnaround - Financing to re-establish a business which has encountered some performance difficulties Own funds Own funds Angel Investors Angel Investors Venture Capital Sales Growth Mezzanine Private Equity Late Stage Late Stage IPO/MBO/MBI/LBO IPO/MBO/MBI/LBO Turnaround Distressed situation Expansion Stage Expansion Stage Early Stage/Start up Early Stage/Start up Time Seed Stage VC PE 12

Private Equity and Venture Capital Annual Returns IRR All calculations are done at the fund level, based on cash flows and NAVs of 1800+ US PE funds. *Source: Thomson Reuters, through 31/3/2008 13 13

PRIVATE EQUITY AND VENTURE CAPITAL-BACKED COMPANIES In the United States, Europe and Australia... Company Company Company Closer to Home... Company 14

INSIGHTS INTO PE INVESTING 15

Extremely In-depth Investment Process Deal Sourcing Preliminary Deal Assessment In-depth Strategic Due Diligence Accounting, Tax and Due Diligence Legal Documentation Monitoring / Business Plan Implementation High Quality Deals Only Growth potential Attractiveness of industry Strength of management Competition Financials Indicative valuation 5-year business plan and projections Product and pricing strategy Marketing strategy R&D strategy Customers Suppliers Competitive strength Detailed Financial Evaluation Tax Compliance Contingent Liabilities Material Contracts and Agreements Licenses Deal structuring Share Purchase Agreement / subscription agreement Shareholders’ Agreement Others – Put/Call Option agreement etc. Business process improvement Active participation at Board and Management level Preferential Rights Network Understanding of business and analysis beyond financial ratios is done. Stringent and in-depth deal evaluation by the investment team to filter out non-quality deals. Extensive due diligence reports prepared by accountants, lawyers and industry consultants will help Fund Managers to get a more qualified representation of the business. An appropriate deal structure (eg. Call / Put Option / Profit guarantee / Deferred payment / RPS etc.) is used to protect the fund manager from certain risks. The term sheet will always have conditions fair to both parties attached. (e.g. No adverse due diligence findings) The Investment Committee (IC), independent to the investment team, will assess a deal and give approval before any investment is made. Disbursement will typically take place within 6 to 7 weeks of signing of the term sheet, barring any adverse findings in the due diligence report. Number of deals: 100 25 12 5 3 T = 0 T + 2 wks T + 6 wks T + 12 wks T + 16 wks 3 – 5 yrs Time: 16 16 16

INVESTMENT CRITERIA Strong industry fundamentals High or increasing market share Strong product or service branding Relatively low cost position Attractive margins Opportunities for value enhancement Proven business model Integrity of management Right Fit – Willingness to admit and work with a PE/VC Investor 17

Common Risks Encountered by the Fund Manager Type of Risk Selected Examples Business Risk Misrepresentation by the entrepreneur Risk of misalignment of interest of the entrepreneur with passive investors Lack of management performance Lack of management focus Risk of misalignment of management interest with passive investors Product development risk (including achievement of commercial break-even) Technology risk Financial risk Operational risk (not related to management) Liquidity Risk Illiquid investment in private companies No readily available secondary market Country Risk Change in regulation or government policy Foreign-exchange risk Market Risk Interest rate risk Global economic cotangent effect Private equity investments aim to achieve alpha returns, by combining thorough pre-investment due diligence with subsequent proactive participation in the business. 18

Post-Investment: Proactive Monitoring Initiatives Review all aspects of the business and implementation of post-acquisition initiatives. On-site visits to ensure company’s operations and performance are in line with expectations or projections. Attend board and management meetings. To ensure: Alignment of Interest Focused Efforts towards Goals Optimal Performance Operational Efficiency Corporate Governance Transparency Regular basis Monthly performance report (including management, operational, financial and industry performance). Monthly basis Report to a risk oversight committee (including business model, competition & current position, exit strategy, risk & risk mitigation initiatives). Quarterly basis 19 19

Post-Investment: Role at BOD and EXCO Preferential and veto rights over key decisions items such as: Replacing CEO, CFO and members of senior management Alteration to the terms of employment conditions Changes to pre-agreed business plans: including new business focus, marketing & strategy Capital expenditure above agreed figure Property/equipment leases above set value Annual CAPEX Operating budgets Issuance & repayment of debt Dividend policy Entering or accepting contracts above pre-agreed quantum Right to conduct special audit as and when necessary 20 20

Case Study 1: Post Acquisition Initiatives for a F&B chain Pre-acquisition Post-acquisition CAGR: >22% CAGR: >30% Revenue Net Profit Careful selection of new stores increases revenue Business performance improvements via implementation of action plans Operational efficiency contributed to higher net margins Improvements in organizational structure to ensure efficient decision making process Improvements in procurement procedures to obtain best prices 21 21

THE MALAYSIAN CHALLENGE 22

WHERE WE ARE 23 GDP Growth GNI Per Capita 2009 US$ Thousand Sources: Economy Watch, IMF, Bloomberg, World Bank, Malaysia Productivity Corporation GDP Growth GNI Per Capita 2009 US$ Thousand High Income Economies M&A as % of GDP Productivity Levels, 2009 US$ Thousand Per Worker 23 23

Source: Bank Negara Malaysia GDP BY SECTOR Source: Bank Negara Malaysia Over the years the trend has been clear: the role of the services sector. Annual Disposable Income 24 24

POPULATION BY COUNTRY Source: World Bank 25 25

Middle and Lower Income Economies THE NEED TO GROW Current Income $7000 ~$15,500 ~$17,500 Average Annual Growth of 6.5% Middle and Lower Income Economies High Income Economies 2010 2020 Per Capita Income USD 26

FUNDING LANDSCAPE IN MALAYSIA Financing Outstanding as end-May 2009 (RM billion) Banking Institution’s SME Loan Approval Rate; % Source: Bank Negara Malaysia 27

INNOVATION MODEL 3 – 5 years 10 – 15 years 3 – 5 years Source: Ministry of Science, Technology and Innovation 3 – 5 years Aggressively pursue market driven innovation and capture short- to-medium term opportunities for value creation Malaysia’s Strategic Positioning and Market Niche Technology Market Identified Market Driven Innovation Risk Capital Continue to actively support and facilitate technology driven innovation for medium to long term benefits Science (Basic Research) Technology Market (to be Identified) Technology Driven Innovation Science Grants Technology Grants Risk Capital 10 – 15 years 3 – 5 years 28

OUR CONTACTS (Pn) Darawati Hussain Chairman (Pn) Ariza Norhalim Secretariat Malaysian Venture Capital & Private Equity Association 26-3, Medan Setia 2, Plaza Damansara, Bukit Damansara 50490 Kuala Lumpur Tel: 03-2096 2094 Fax: 03-2095 8992 Email: info@mvca.org.my 29